Thursday, March 01, 2012

Confused about MMR

Honestly, I'm still confused by this distinction they're making, because I'm not sure what difference it makes. At a sector level, I stick with Net Financial Assets (equity) instead of "savings" because there's lot of ambiguity around the word "saving", and at an agent level, it seems that if you spend some of your income on an apple you want to consume next period you are saving, but if you intend to eat that apple sooner you are no longer saving. I'm actually sure that's right from a NIPA perspective, but it obscures for me the key intuitions I found in the Harless post, and when Mosler calls savings the "account of record" for investment. Maybe it was the other way around.

Anyway, I must be stupid.

Moving on, I become even more confused about what MMR's beef is with MMT. I suspect it's because MMR suspects that MMT is really Communist. The irony is unimaginably delicious. But first, this post:

For instance, when the USA runs a current account deficit and a budget deficit that does not offset the leakage in the current account the private sector position has been described as experiencing a “net loss” in some MMT literature. But no clarification as to the specifics of this “net loss” is provided (in terms of real or financial wealth) and the reader is likely to come away from the lesson believing that the private sector position is automatically worse off if the government does not deficit spend at all times. But this is clearly not the case as the majority of private sector real wealth creation occurs through the horizontal banking system through credit creation. This can clearly be seen over the period from 1997q1 to 2008q2 when the government budget deficit failed to offset the current account deficit in 38 of the 42 quarters and household net worth increased by 110% while corporate profits rose by 140%. Clearly, the private sector did not experience a “net loss” over this period even though the budget deficit failed to offset the current account leakage.

The confusion arises from the difference between real wealth and financial wealth as well as misunderstanding saving. A good way to think about all of this is to understand that the private sector can create real wealth entirely independent of the government. A farmer does not need the government to turn 1 cow into 10. But the farmer has achieved real wealth creation regardless of the government’s spending position. What the government must generally do over time is help to facilitate the wealth accumulation process by providing the net financial assets to help the private sector monetize this real wealth. But it’s important not to put the cart before the horse here. It’s best to think of government as being a facilitator of wealth creation and not the driver. Hence, our focus on S=I+(S-I) with the emphasis on the idea that “the backbone of private sector equity is I, not Net Financial Assets.” The idea is not novel, but simply clarifies the understanding of the private sector component.

Talk about confusing!

1. Whether the private sector is better or worse off if the Government runs deficits or surpluses depends on whether the private sector lacks or has excess net financial equity (assets). Without this context, there is no "better" or "worse".

2. I have no idea if the majority of private sector real wealth creation happens through bank loans. Is raising a child real wealth creation? Do you need a bank loan for that?

3. 1997-2008 is a terrible time period, because of this thing called credit bubbles. If you don't understand how credit bubbles happen, you really don't understand the interplay between vertical and horizontal money creation.

4. The government mustn't "facilitate the wealth accumulation process by providing the net financial assets to help the private sector monetize this real wealth". It must correctly fund the private sector's demand for net financial assets (equity) so as to maintain full voluntary employment, without politically unacceptable levels of inflation.

5. Government can create real wealth too. (Heresy, I know. Please observe, I'm not saying that it does very often, or that it does it well, or that it should do it. I'm merely pointing out that it is, at least, theoretically possible, and there are probably an example or two we can all think of where this has happened if we're being honest with ourselves).

188 Comments:

"…A farmer does not need the government to turn 1 cow into 10. But the farmer has achieved real wealth creation regardless of the government’s spending position…"

Maybe, but if the government doesn't monetize his creation of 9 cows he's likely to be stuck feeding and eventually eating them because no one will be able to buy them (unless a barter transaction could be worked out with someone).

I guess all I need to do is go out and build a bunch of spec houses and my depression will be over.

From the previous thread, I believe it was clear your definition of saving was different from NIPA.

"Is raising a child real wealth creation? Do you need a bank loan for that?"

If you are playing "look who's bigger?" government debt (financial wealth for the rest) or non-financial assets here are the numbers for the US:

Nonfinancial Assets of (at the end of Q3 2011)

Households and Nonprofit Organizations~ $23tn

Nonfarm Nonfinancial Corporate Business~ $14tn

Nonfarm Nonfinancial Noncorporate Business~ 7-8tn

"Without this context, there is no "better" or "worse"."

I believe that comment was in response that if the private sector financial balance is negative it has a net loss which is analytically incorrect. Businesses can be in profit and households can have positive saving even with the budget in surplus and the external sector in imbalance.

There is a genuine mistake because the phrase "net loss" has a specific meaning in business accounting. And it's coming from the same set of people who accuse just about everyone of intellectual dishonesty.

One can have a separate debate on which is more "dominant" - fiscal policy or private investment (and I favour the former) but that shouldn't help you cover the glaring factual errors being discussed.

From the previous thread, I believe it was clear your definition of saving was different from NIPA.

"Is raising a child real wealth creation? Do you need a bank loan for that?"

If you are playing "look who's bigger?" government debt (financial wealth for the rest) or non-financial assets here are the numbers for the US:

Nonfinancial Assets of (at the end of Q3 2011)

Households and Nonprofit Organizations~ $23tn

Nonfarm Nonfinancial Corporate Business~ $14tn

Nonfarm Nonfinancial Noncorporate Business~ 7-8tn

"Without this context, there is no "better" or "worse"."

I believe that comment was in response that if the private sector financial balance is negative it has a net loss which is analytically incorrect. Businesses can be in profit and households can have positive saving even with the budget in surplus and the external sector in imbalance.

There is a genuine mistake because the phrase "net loss" has a specific meaning in business accounting. And it's coming from the same set of people who accuse just about everyone of intellectual dishonesty.

One can have a separate debate on which is more "dominant" - fiscal policy or private investment (and I favour the former) but that shouldn't help you cover the glaring factual errors being discussed.

Ranaman: Calm down. I accept that the definition I was using was different from the NIPA one. And I'm fine with the NIPA one, but I am concerned because I don't know where the difference is material. When you make a change you should know what the consequences should be. I don't, because (as I said in my post) I am stupid.

Also, if I wish to fully unleash my inner pedant, I would take issue with JKH's statements such as "The correct economic definition of saving is disposable income not spent on consumer goods."

Because this is not true. The actual correct economic definition of saving is disposable income not spent on goods consumed in the same period. So, if you buy it and consume it, then you haven't saved. If you buy it and don't consume it in this period, or you don't buy it at all, you've saved.

Is an apple a "consumer good"? It depends on whether you eat in within the period, or not. If you eat it out of the period, it's an investment.

Similarly, a durable good is almost always a combination of consumption and investment, because you use up some of it in the period, but most of it is still available next period.

And I also disagree with your comment that MMT accuses people of intellectual dishonesty. MMT in general things people don't know what they are talking about and don't get the accounting straight -- which isn't dishonest, just stupid and lazy.

Everyone can play the glaring factual error game, so I can claim it's a glaring factual error to state that all manner of leverage enabled real output is larger than non leverage backed real output. I think your table illustrates my point -- child raising (and all sorts of activity that generate real output) is not captured as a "non-financial" asset.

And again, your statement proves my point -- businesses can be in profit and households can have positive savings and the government can run surplus and the economy can grow. All of this will be fueled by private debt. Excess private debt can cause problems, and some of the "growth" may not be viewed as growth at all. Animal spirits etc.

"The causal relationship in MMR seems to be classic supply side - which I find interesting."

Yes Neil, we are in favor of massive govt spending to boost demand, I've written about harsh regulations for the banks ad nauseam at Pragcap, we believe govt is a necessary cornerstone for healthy economic growth (and that its strengths should be embraced and optimized to boost economic growth) and yet we are "supply siders". That made me smile.

I know you guys feel this bizarre need to discredit us (as though the MMT framework is SO weak that 3 random guys can discredit it in a matter of weeks!) but maybe research our ideas would a little bit before saying totally ridiculous things that mischaracterize us and make it clear that you aren't the least bit familiar with our positions.

Personally, I'd like to squash the whole MMT vs MMR fight, but that's just me....

PS - Winterspeak, you put a lot of words in our mouths here, but that's another matter....

"As though the MMT framework is SO weak that 3 random guys can discredit it in a matter of weeks!"

You don't want a fight, but those are fighting words if I've ever seen them. Even if something was factually wrong in the MMT literature, it would mean that something is wrong, and all that depends on it being right could be wrong, not all that MMT encompass is wrong. It happens in science all the time, the guys or gals who make a big discovery like that doesn't say "HA! Ha, our team disproved physics!" To the contrary, he says it's stronger. What is clear from viewing the comments on econ blogs is above all else some frequent posters just have a personal vendetta.

Once again, it needs to be emphasized that one cannot derive substantive quantitative and causal conclusions about which transactions are or are not the backbone of some larger pool of transactions, or about which activities and operations do or do not "drive" the economy, simply by examining identities and accounting logic.

We know from Godley’s equation that S = I + G – T + X – M.

Does this tell us that I (private sector investment) is the backbone of S? Does it tell us that G (government spending) is the backbone of S? Does it tell us that X is the backbone of S? No, it tells us none of these things.

In an economy with a very small government sector and very low exports, G and X might very well be dwarfed by I and be driving the creation and distribution of real wealth. In a state capitalist economy with a very large government, G might very well dwarf I and X and be driving the creation of real wealth. Both of these scenarios are possible. Both are consistent with Godley's equation and both are consistent with MMT. Which types of expenditures are driving the growth of national savings and the creation of real wealth is the result of public policy choices, and cannot be derived from identities and accounting. The MMT framework is consistent with any size government, and with any system with a floating fiat currency.Imagine an economy in which the government is responsible for 75% of all capital development. That is, to keep things simple, suppose in this imaginary economy that the government owns and operates 75% of firms, and as a result does 75% of the purchasing of capital equipment, 75% of the inventory building, etc. Suppose that the economy is isolated from the rest of the world and does not do any importing or exporting.

So in that economy, we still have

S = I + G – T + X – M.

which in this case, since X and M are zero, reduces to:

S = I + G - T

Suppose the actual quantities instantiating the above equation are:

$7 Trillion = $2 Trillion + $6 Trillion - $1 Trillion.

In this economy, JKH's equation is still true, because it is a logical tautology:

S = I + (S-I)

and the actual quantities are

$7 Trillion = $2 Trillion + ($7 Trillion - $2 Trillion).

But is I the backbone of S in this economy? Clearly not. G is the backbone of S in the imagined economy.

Our own economy is not like the imaginary economy in the example I just gave, so private sector investment might be the “driver” of economic growth. But let’s note that one of the things that is chronically getting left out of these discussions is the role of consumption. Maybe that’s because the “C” term gets cancelled out in the derivation of Godley’s equation. But one of the equations used in that derivation is:

Y = C + S + T

That means that instead of Godley’s equation, we could focus instead on the following equation for national income:

Y = C + I + G + X – M.

Does this now prove C is the backbone of Y? No. But it does point to a big elephant in the room that has been left out of the discussion.

What has been missing in these discussions so far, although Neil alludes to it with his comments on demand-signaling, is the Keynesian and post-Keynesian tradition which highlights demand. What actually “drives” the economy, I would say, is human desire. The economy grows because people want more. In economic theory, what people want is manifested as the concept of demand. People produce to satisfy demand. They might produce something for their own personal consumption. But more typically they produce in order to exchange what they produce for something else, which they will then subsequently consume.

Contrary to Monsieur Say, people and firms don’t typically produce things first, with no desire to consume the product themselves and no reliable information about whether someone else is eager to consume it. They assess or predict the effective demand for the product, and then make their investment decisions accordingly.

The central theme of Keynes and the post-Keynesian tradition, as I understand it, is that the social mechanisms in contemporary capitalist economies by which people’s desires to consume more are translated into an incentive for producers to produce more, and by which people’s willingness to work more for what they consume are translated into labor opportunities that provide them with the additional income they need to purchase what they desire to consume, function very imperfectly. As a result, the economy can settle into a more-or-less stable equilibrium of underperformance and unemployment for a long time.

That’s the basis for the need for an active public sector: People need to take a big picture view of both the the successes and failures of the private sector market system, and then accomplish through deliberate, thoughtful public choices, executed through their government, the important productive tasks that are not accomplished by the world of firms and households operating only according to private incentives in a market system.

Neil Wilson, Cullen Roche:"Supply siders" should not be interpreted here in the Reaganesque way. Below is part of my reply to JKH at the MMR blog:

[Personnaly, I am not debating with you your take on saving, as I said, I concur. Where it is getting a bit more touchy is when you say:“With such a translation of value, household sector assets incorporate all corporate sector value via financial markets, including the value of corporate saving.”This is factualy true as my example has shown (and it would be wrong to claim that all MMTers are unaware of this). This being said, I would say that this would sound a lot like trickle down economic to MMT ears. MMTers could interpret this as you saying that the household sector is ultimately -for a lack of a better word- the owner of the means of production. Therefore, any increase in retained earnings (corporate S) is ultimately a wash for the household sector even it means for them a negative households S. I think this kind of intepretaton could lead to all kind of wrong-headed policy implications. I am from Canada, and there was a big debate in Canada about corporate tax cut. This intrepretation could lead one to say that corporate tax cuts are great for households in any case, because even assuming that everything else remains the same, corporate tax cut will lead to an increase in corporate S, and thefore will be “projected” in some fashion to the value of the common stock claim held by households in any case. Again, what you are saying is factually correct, and MMTers (at least some) are surely aware of this. I am just not sure what this interpretation brings in term of policy implications that could lead MMTers to say: “gosh, we were wrong on this one.”]

Neil, we're not "obsessed" with I. We're simply clarifying a point that a lot of readers are confused about. We're trying to bring some balance to the discussion. No one is saying govt spending is bad or that govt is bad. Hell, my main policy proposal involves boosting G so I think you're wrong to take one recent discussion and make sweeping conclusions about us.....

Tschäff - I was being facetious. My point (which didn't come across over the internet!) was that the MMT position is very strong and it's absurd to get so defensive about what we're doing. We disagree on some stuff, but we agree on a lot more.

The whole S=I+(S-I) thing isn't some "gotcha" moment. It's a clarification that I think some MMTers are getting way too bent out of shape over....And since MMT agrees that I is really important I'd have expected you guys to say "yes, clarity is good and that should be emphasized more in the future". Instead, you all overreact and jump to false conclusions like you usually do....

vimothy, my point is that the economy is a complex causal system. You can't figure out what the engine of some system is just by looking at the different kinds of pieces of that system and determining which of the pieces is largest.

If during some period of time some group of people is devoting an increasing share of their income to the holding of money and other financial assets, and less to the purchase of consumption goods and capital goods, the question is what motives are causing them to do this, what effects on other aspects of economic activity do those motives have, and what policy changes or other systemic changes would or would not influence those motives.

Throwing up to three million people to the wolves isn't just disagreeing on stuff - it's a fundamental difference in the value placed on the quality of a human life.

Boosting G for some and not all is the same policy as the current lot. Changing the 'some' doesn't change the focus. It's the same appeasement strategy pursued by Krugman and Baker, et al - just with tax cuts rather than road repairs.

Sorry vimothy, you lost me. Are you saying that MMT either says or insinuates that S consists mostly of government debt?

Isn't MMT the side that has insisted in focusing on "net saving" and S-I? It seems to me that this is a very common-sense use of the term "saving". If I am the proprietor of a business, and if during some week I receive a payment for $1000 of which I use $100 to buy myself a bunch of pizza and $500 to buy a new computer for the office, and then put the other $400 in the safe, then I think the man on the street would say I have consumed $100, invested $500 and saved $400.

But when we use "S" to capture the concept of saving, we get the result that I have saved $900. Whose use of "saving" is more stilted here?

MMT is indeed very confusing and garbled if one insists on interpreting their words not in the way they have explicitly directed them to be interpreted in their writings, but in some other way which then makes what they say come out false.

Are you saying that MMT either says or insinuates that S consists mostly of government debt?

Some MMTers have said suggested that "savings" consist entirely of government debt, that saving commonly understood in economics is not a real metric, and that saving properly understood is actually "net saving".

These are not my claims but the claims of MMTers.

SRW original criticism, made quite a while ago, was that MMTers sometimes confuse or conflate net saving with saving.

However, SRW implied that this confusion was caused by enthusiasm / sloppiness by MMT advocates in the blogosphere--but this is not really supported by the statements of leading MMTers, as far as I can see.

Now, it's fine if you wish to go with a new definition of saving--although, it would be nice if MMTers were more upfront about this--, but what it implies from the point of view of macroeconomic relationships is totally incoherent.

Do you think that aggregate saving and investment is possible? If the answer is "yes", then you need the proper definitions of the terms.

Whether or not you have a degree in economics and I have a degree in mechanical engineering is irrelevant to the argument at hand. My education cost lot's of money too.

I have just been insisting that when push comes to shove I rely on math rather than data, especially when the interpretation of data is questionable.

You can drag up all of the data you like that claims F!=ma, you won't ever be able to make your argument unless you can prove F=ma is false.

In this case it's the sectoral balances identity. The burden of proof is on you to prove that it doesn't always hold. I know the difference between savings and net savings and financial assets and net financial assets as does pretty much everyone else involved in this argument.

We will continue to go in circles on this until you prove your case by stating a generalized mathematical relationship with a proof demonstrating where MMT is wrong.

So far all you have proved is that sometimes people use the wrong terms while presenting arguments on the internet. Who knew?

One more round, please, because I believe I am close to understanding you.

Do you recognize a distinction between real saving and nominal saving (that is saving conceptualized as unconsumed goods, and saving conceptualized as unspent income)?

Assuming the answer is "yes," I have two logically related follow-ups:

1. Do you believe it is possible for a nation to dollar-save more income than would be required to purchase all the goods that go unconsumed in a given accounting period?

2. If so, do you use "saving" to conceptualize:

a) The real goods that go unconsumed in a given period, or b) The dollar income that goes unspent in a given period, orc) The unspent dollar income in excess of what would be required, in some counterfactual, to purchase all the unconsumed goods at prevailing prices.

I'm not making an argument, I'm just being sure I understand your position!

I'm also assuming that your definitions will accord with the standard view of macroeconomics taught in the textbooks. Please correct me if I'm wrong.

Which economic understanding are you referring to - there are lot's of them.

Can you make a statement identifying which tenet of economics I don't understand? Or is it all of them?

One of the major flaws in economic theory (as practiced by the high priests) is that there is no closure in their models. Their models represent bits and pieces of a real system, based on unrealistic assumptions that almost never hold in the real world.

Do you recognize a distinction between real saving and nominal saving (that is saving conceptualized as unconsumed goods, and saving conceptualized as unspent income)?

No--I'm afraid not.

The difference between real and nominal is the difference between constant and current prices.

On some level, monetary income and income in terms of goods and service must be equal.

To save means to not consume all income. Since expenditure equals income, and there is only consumption and investment to choose between, the equality of saving and investment for the closed economy considered as a whole follows directly (it's "trivial" to prove, as Harless notes).

Do you believe it is possible for a nation to dollar-save more income than would be required to purchase all the goods that go unconsumed in a given accounting period?

Not sure what you mean, sorry. Could you explain a bit more? I'm having trouble with the notion of saving more income than would be required to purchase all consumption goods that are unconsumed.

If so, do you use "saving" to conceptualize

Saving just corresponds to unspent income--adjusted for changes in the value of the currency (real flow of saving) or otherwise.

It gets complicated because although an economy considered as a single sector would require S = I at all times, when we partition the economy and open it to the outside world, this is no longer the case.

Lets say that we're in a closed economy and that G = T. Then we can write S = I with no ambiguity (hopefully!).

What seems like the right way to think about things to the average guy on the street is not the basis for a serious analysis of the economy.

If you buy an asset with some cash, then you have less cash and more other assets. This has nothing to do with saving per se. If the asset is worth less to you than you paid for it, this too has nothing to do with saving per se.

That you don't understand my listed options makes perfect sense, because those options will not be intelligible without a working distinction between the nominal and real. So by answering "no" to this:

"Do you recognize a distinction between real saving and nominal saving (that is saving conceptualized as unconsumed goods, and saving conceptualized as unspent income)?"

You've closed off the rest.

Which is fine with me, since I was only trying to get clear on what you think.

And I have!

I also understand completely your confusion with respect to my usage of the word "nominal."

My use of "nominal" in these comments was not the standard economics usage: current (i.e not-adjusted for inflation) prices.

It was the philosophical usage, whereby "nominal" refers to the representation of a real thing within some logical system.

Totally important, and totally clarifying for me in understanding Harless and Mosler's S=I.

George: Do you recognize a distinction between real saving and nominal saving (that is saving conceptualized as unconsumed goods, and saving conceptualized as unspent income)?

vimothy: No--I'm afraid not.

The difference between real and nominal is the difference between constant and current prices.

GEORGE: There are two different definitions of "real" floating around there. Hopefully vimothy will be scrupulous in being clear which one he is using where.

One is a index-modified nominal number. You take some index (CPI) and you see how that's changed, and then you inflate or deflate the current time period nominal number by that other nominal number. So,$1 today was worth $10 in 1950, or whatever.

The other is a sweat and atoms term. If it is composed of sweat and atoms, it is real. Otherwise, it's just a number in a spreadsheet, which may or may not be index inflated or deflated, and that index inflation or deflation may or may not be accurate.

Both are useful. But they are different.

Your characterization of real saving being unconsumed goods, and nominal saving being unconsumed income is exactly right. A good produced but consumed in a future period is called "investment".

This is the heart of why S=I.

Nominal income from production can either be consumed in this period, or consumed in a future period. If it is consumed in a future period, it is called "savings" in this period.

Real production can either be consumed in this period, or consumed in a future period. If it is consumed in a future period, it is called "investment" in this period.

What seems like the right way to think about things to the average guy on the street is not the basis for a serious analysis of the economy.

Well, I have a suspicious mind vimothy. I don't think the current national accounting convention that includes all capital expenditures under the category of "saving" is a basis for serious economic analysis at all. It's a strange terminological choice that, in my estimation, deliberately obscures economic reality by combining two very diverse economic activities under the same card in a three-card monte game.

So when MMT highlights net national saving, that is S-I, and tends to use "saving" to refer to that rather than to gross national saving S, then I think MMT is on the side of both common sense and a clearer picture of economic reality.

I don't think it's fair to say that the terminology deliberately obscures economic reality. Being precise about these things is genuinely hard.

Maybe winterpeak. But my feeling is that economists have helped conservative politicians by re-defining investment as a kind of "saving" so that they could then defend the view that saving is equal to investment in a one-sector economy, and hide surplus, uninvested savings under the rug in their macro models. Then they tell people that every dollar saved is invested somewhere and that you can't tax savings without damaging investment. It is pretended that ownership equity rents, money in safes and money in government securities is all flowing into actual capital development. But it's not. Some of it is just saved up, hoarded, socked away.

One of the points Scott F. has emphasized in the past is that, parallel to the MMT claim that taxes are not a requirement to fund government spending, is the claim that private sector saving isn't needed to fund private sector investment, since bank credit is not reserve constrained. That point is obscured if one insists on labeling investment as automatically a component of savings, simply as a semantic courtesy.

So I'll just try to keep remembering to use "net" when I talk about saving, and keep focusing on the fact that that very useful and intuitive concept of saving is S-I, not just S.

If you keep it all nominal, G-T= net financial assets of the non govt sector. That's the 2 sector model.

But it begins with the one sector model, where S=I, and S-I=0

In the two sector model, S-I= domestic 'savings"/accumulation of nfa, and G-T= Govt. 'savings'/accumulation of nfa. And total savings of NFA = 0

Going to a 3 sector model, X-M is just foreign savings, defined as net financial assets.

So in that 3 sector model where S-I is domestic holdings of financial assets only, and X-M is non resident holdings only,the total domestic plus non resident = (G-T)

With sector analysis of 'inside money' the sectors add to 0. Expanding the number of sectors doesn't alter the 'fundamental maths' of the 1 sector model.

So S= I + (S-I) is a 1 sector model identity, as there either is no X or M or G or T or it assumes that they equal 0 and therefore those sectors are of no consequence for this point of analysis?

this all reminds me of the long history of thought including smith, ricardo, marshall, keynes, hayak, von mises, keynes, sraffa, lerner, friedman, lucas, modigliani, and all the rest who raised points of endless debate that get resolved via MMT.

Some people interpret it as the one sector model, others see it as a comment on the nature of private investment in a standard 'three sector' economy.

As you point out S = I + (S-I) doesn't make sense in a one sector view. Which is what make me think it isn't a one sector view - but a statement on the relationship between saving and investment in the domestic private sector

Also the private sector’s net financial assets can change other than because of a flow of funds from/to other sectors (e.g. when shares change in value). Thus even the phrase “change to net financial assets” is not right. It should read something like “change in net financial assets attributable to flow of funds from/to other sectors”.

Re the two sector model, S-I=G-T, S is “flow of funds to private sector”, and I is “flow of funds out of private sector”. But the latter is far removed from the normal meaning of the word “investment”.

Warren, no I don't think they intend S= I + (S-I) as just a 1 sector model identity. It's a logical tautology that is true no matter how many sectors there are, and no matter how many are being considered. All it says is that private sector gross saving is equal to private sector investment plus private sector net saving, and this is true whether the sector is in deficit, surplus or balance. S is always a component of the three sector model, and JKH is just claiming that S always consists of investment plus the part of S that is not investment.

So the issue, as I see it, is not that the identity only applies to a one-sector model. The issue is why someone would think the identity is interesting, or reveals or points to something that wasn't fully recognized before.

Their claim seems to be that MMT just focuses on private sector S-T, the balance of the whole sector, without paying attention to what is driving economic activity and production within the sector.

But there is a large volume of MMT literature, to take just one example, on why fiscal policy and treasury-driven injections of NFAs are superior to and more effective than central bank injections of NFAs. And the story there is all about where aggregate demand and the increased production generated by increases in aggregate demand actually come from. This thinking goes beyond the sectoral balances equation because you can't derive these causal conclusions just by looking at sectoral analysis. But the actual transmission mechanisms associated with different kinds of injections of NFAa is something that MMT writers have talked about at length.

Warren,Specifically on the issue of saving, my take is that MMR agrees that (S-I) is a measure of net financial assets accumulation in the private sector, but they claim that it is not savings per se. Savings is "S", not (S-I). For example, in an accounting period where you have massive corporate profit (massive S) and massive level of investment I, and where I>S, MMR consider that it would be wrong to say that the private sector has experienced a "net losses" or that it is "dissaving", or that the private sector strenght is decreasing. This is why MMR is particularly fond of this type of graphical representation where I and S is treated separetly:http://monetaryrealism.com/paul-krugman-does-s-i-s-i/

Both (X-M) and (G-T) are obviously by their very nature FLOWS or CHANGES to a stock. Therefor (S-I) must also be a flow or “change to a stock”.

That being the case, S must be defined as the flow of funds INTO the private sector, and “I” must be defined as flow of funds OUT OF the private sector.

But in this case, investment (that is, “I”) is not being used in anything resembling the normal sense of the word. That does not matter as long as all six terms are clearly defined every time the equation is cited. But the problem is that using the word “investment” in the above peculiar sense gives rise to a HUGE amount of confusion. Witness the above comments.

So a possibly better way of writing the equation is to dispense with “investment” and just write:

I've read your analysis before and your point here and I do agree with it.

I have never placed a lot of Importance in the S and I terms because in the sectoral balances we are looking at flows. The sum of these flows does accumulate to a stock however.

I only presented the derivation of S and i to point out that through all of the sturm and drang over this issue they are still stocks composed of all of the ∆S accumulated over time, just like the National Debt is equal to the sum of all deficit/surplus' over time.

The SB equation is derived from:

Y + I + C + G + (X - M)

Y = C + S +T

Whatever the context (definition) of S and I is in these equations holds for the derived SB equation. I don't know what the strict definitions of S or I is here - guess I should look into it.

What I do know is whether the definitions are the same or not they are equal in magnitude in the outcome. That makes them the same.

Conclusions that I have come to after everything is said and done:

Savings is defined as the total accumulated net financial assets of the non-government over all budget cycles created by net government spending. Any other definition of savings is relatively unimportant.

It is mathematically impossible for horizontal money creation to add to or subtract from the total of savings by this definition. It can only move actual savings around among agents in the non-government.

Horizontal money creation allows for agents in the non-government to accumulate dollar liabilities in excess of their ability to satisfy said liabilities because of other agents "hoarding". Total or net savings is unaffected.

for purposes of my analysis I focused on net financial assets, which are commonly also called 'savings' though 'savings' is clearly used in other ways at other times by others.

i never did call it 'sector analysis' in 'soft currency economics' though that's what it was. and the further purpose was to get to the core cause of unemployment, also as defined (people looking for work paid in that particular unit of account).

also, the s=i+(s-I) is a one sector model. yes, it applies to multi sector models, but so do all one sector models, much like the one bank model also applies to multi bank universes, etc.

yes, expanding to more sectors and more banks serves to bring in additional considerations, but doesn't obviate the 'truths' of the one sector/one bank model. In fact, the point of beginning with the one sector model is to make a point that carries throughout the analysis, however much expansion of the model compounds it.

Nor can I be anything other than equal to S as a matter of accounting, whether the analysis is in nominal or in real terms. In nominal terms it just means there is an asset and a liability, one side accounted for as savings and the other as investment.

In real terms much the same happens. If a company builds a lump of concrete and the accountant expenses it there is no savings and no investment. But if the accountant capitalizes it there is an asset and an equal liability (higher net worth)- an investment and equal savings.

The best way to think of it is to think of savings as the accounting record of investment.

even if you build a house with your own labor and materials, and you make your own balance sheet, any value you give to your house would then increase your net worth, which means an asset and an equal liability. and you could label one an investment and the other savings and be consistent with general accounting methodology.

as for 'stocks and flows' savings is the accounting record of investment for any period of time which includes from inception. So no need in the general case to specify 'stock or flow' for S=I.

To address an additional point made in prior posts:

In a one sector model:

In real terms S always = I and there is no part of S that is not I.

In nominal terms S always = I and there is no part of S that is not I.

by the way, this savings/investment thing takes me back to the 1990's when I went through it with the likes of Tom Palley at a crowded conference dinner, Tom tossing up all the points made by the mainstream used to counter what I'd been saying, Tom taking in what I was saying to throw back at them. Basil Moore at the Bretton Woods conference going over it with me over drinks for several hours after which he asked if he could use the expression 'savings is the accounting record of investment' for his coming book, for which I was duly honored, working with Randy on his book, Paul Davidson in various group discussions where he kept coming up with Keynes quotes to support what I was saying (I never have read Keynes, just read lots of Keynes quotes), discussions with various central bankers including extensive discussions with Charles Goodhart, and of course Art Laffer when his firm edited Soft Currency Economics for me. Not to mention all the Wall St. economists I conversed with on a regular basis.

So not to say that something new can't pop out, but it's all actually pretty simple stuff with the nominal just a case of what's called 'inside money' in the old texts. So there really isn't much there.

And so, for example, if a govt is running a deficit in its currency of issue, like the US spending more dollars than its taxing, some other entity is getting those dollars in one form or another- in this case cash, reserve balances at the fed, or balances in securities accounts at the fed (tsy secs).

It's also/more commonly called 'National Savings' which is the same thing, opposite sign.

But notice this:

IPSAS 7—ACCOUNTING FOR INVESTMENTS IN ASSOCIATES Acknowledgment This International Public Sector Accounting Standard is drawn primarily from International Accounting Standard (IAS) 28, “Accounting for Investments in Associates” published by the International Accounting Standards Committee (IASC). The International Accounting Standards Board (IASB) and the International Accounting Standards Committee Foundation (IASCF) were established in 2001 to replace IASC. The International Accounting Standards (IASs) issued by IASC remain in force until they are amended or withdrawn by IASB. Extracts from IAS 28 are reproduced in this publication of the Public Sector Committee of the International Federation of Accountants with the permission of IASB. The approved text of the IASs is that published by IASB in the English language, and copies may be obtained directly from IASB Publications Department, 7th floor, 166 Fleet Street, London EC4A 2DY, United Kingdom. E-mail: publications@iasb.orgInternet: http://www.iasb.orgIASs, exposure drafts and other publications of IASC and IASB are copyright of IASCF. “IAS,” “IASB,” “IASC,” “IASCF” and “International Accounting Standards” are trademarks of IASCF and should not be used without the approval of IASCF

"Some contributions made by public sector entities may be referred to as an “investment” but may not give rise to an ownership interest. For example, a public sector entity may make a substantial investment in the development of a hospital that is owned and operated by a charity."

Ramanan, Could you please just go away with your silly cheap shot? I am interested in an academic discussion between adults.

Warren, Thanks for your response. What is your take on the following comment posted by JKH ( published on CNBC... It would be great to have your take actually on his entire comment, not just the extract below):"Private sector consolidation within SFB is not an indicator of saving per se. Consolidation obscures the core underlying saving dynamic of the private sector.All private sector saving can be condensed, in effect, to a measure of household saving alone – by projecting the cumulative value of corporate saving onto the household balance sheet."

Well, I don't really think S = I + (S-I) is a model of anything. It's not even just an accounting identity. It's an algebraic identity like x = y + (x-y). You don't need any accounting assumptions at all to prove it.

I take it that all they are trying to argue is that even if S-I is negative and the private sector is losing net financial assets to the other sectors, you could still have positive S and positive I. This could happen when the private sector is drawing down its financial assets to pay for capital investment.

Not a good thing when the private sector as a whole is trying to pay down its debts and reduce its leverage rather than take on more of it. Otherwise, the whole discussion seems like a bit of a sideshow.

If the purpose is simply to show that one sector's increase in net financial assets have to come from another's decrease, 2 sectors are fine, and maybe 3 to further make the point and show the possibilities.

If you are trying to determine if the house hold sector is getting over leveraged, or is under leveraged and might be ready for a credit boom, you want to further subdivide the domestic sector into households and businesses, etc.

So subdividing sectors can be a tool of discovery.

And when looking at the euro, turns out the high deficit member nations have high household savings of net financial assets with a very low leveraged consumer, whatever that might mean. Again, it's all about your further purpose of analysis.

So I'd ask JHK, why do you care about 'savings per se' whatever that is? and 'what do you mean by 'the underlying savings dynamic' and why do you care about it?'

and yes, corp savings can be 'condensed' to households, which is the argument for many things (including eliminating all corporate taxes) but what specifically are you trying to get at here? that is, what's the further purpose of you're inquiry? And high corporate liquidity probably isn't going to help someone make his mtg payment even though he is a shareholder via his pension plan, etc.

that is, JHK is stating a few things, obvious to some of us, not so obvious to others, but without some further purpose expressed it's not all that interesting and I don't see much to comment on?

Warren, Thanks a lot for your response, greatly appreciated. Last question (I promise!), Cullen Roche and others at the MMR blog have taken issues with your statement regarding "the U.S. $ is a simple public monopoly", saying horizontal activity is huge in deciding "Q" (through dollar denominated deposit creation) and "P" (through interest setting on loans), what would be your response to this?

And Price setting for a monopolist takes two forms, as per Marshall (1890).

1. The 'own rate' which is how the thing trades for itself. For a currency this is the 'risk free' interest rate which govt sets (currently the fed votes on it, etc)

2. how the thing exchanges for other goods and services, which we call the price level.For the US, this means the price level is a function of prices paid by gov when it spends (and/or collateral demanded when it lends) whether it knows it or not, likes it or not.

We need the gov's $ to pay our taxes (and net save) and the govt 'tells us' when it spends what we have to do to get it.

Yes, it does help, short supplementary though... Take a government that runs a budget surplus but who does not want to decrease the level of outstanding government debt in the private economy (Canada style), so the government accept private IOUs in the form of term deposits at private banks for the payment of the "net tax" imposed on the private economy (this is what happened in Canada in the budget surplus years). Would you still say that "we need gov's $ to pay our taxes" in this particular case?

if gov taxes without spending it subtracts from bank clearing balances (called 'reserves' in the US)

it can then lend to banks to 'replace' the lost clearing balances in a variety of ways. this 'leverages up' the non govt sector is functionally the same as with reducing tsy secs outstanding. Govt. insured bank deposits are functionally nothing more than govt. secs.

so the surpluses still reduce private sector net financial assets of $C.

And for all of it's natural wealth and small population, Canada's unemployment- those willing and able to work who can't find paid work- is a total disgrace.

"Why, semantically, is T equivalent to Sg, and M equivalent to Sx, etc.?"

It's not semantics. It's algebra. They are equivalent as a matter of mathematics.

The problem is the semantic load people bring to the variables 'G', and 'T', 'M' and 'X'.

They think they mean something specific (and for some people ever unchanging), when they are just mathematical variables and the underlying meaning/value changes depending upon the analysis you are doing.

Two sentences that have the same logical form are not necessarily "equivalent."

For that we need semantics, i.e. the interpretation of formal structures. I wasn't asking you for the eternal interpretation of Sg and T. I was asking you for the interpretation under which your two formal sentences were identical.

That's a relevant question, considering you did not in fact deduce one from the other.

Do you recognize a distinction between real saving and nominal saving (that is saving conceptualized as unconsumed goods, and saving conceptualized as unspent income)?

I was in a bit of a rush the other day—I might be able to provide a better answer to this now.I would not characterise the distinction between real and nominal saving as one of unconsumed goods vs. unspent income. The real flow of saving is the value of that saving at relative or constant prices. The nominal flow of saving is its value at current prices. This is an important distinction in its own right, but it is not so important here, and given the complexity of the conversation, I suggest leaving it to one side.

From a sufficient level of aggregation, income earned and goods sold must have the same value, since the reverse implies one sided transactions—i.e., resources appearing out of the ether, or disappearing into it.

So that, defining “spending” as consumption expenditure, unspent income is equal to final goods and services that were sold but were not consumed, i.e., unspent income is equal to saving is equal to expenditure on investment. (This can be made more complicated by factoring in other sectors like the government and the outside world—but the principle remains the same).

We could write a sectoral budget constraint in the following general form:

Resources available = use of resources available

Saving is the process by which we use resources available (specifically, unconsumed current income)to add to resource available in future periods (by financing the acquisition of new assets).

When you define saving as income net of total expenditure on consumption and investment, you lose the ability to distinguish between consuming your resources and adding to them. (And if you follow the thread to its logical conclusion, you end up concluding that aggregate saving and investment is impossible).

Here is Laurence J. Kotlikoff on saving (from the Concise Encyclopaedia of Economics, quoted in an old Prag Cap thread):

“Saving means different things to different people. To some, it means putting money in the bank. To others, it means buying stocks or contributing to a pension plan. But to economists, saving means only one thing—consuming less out of a given set of resources in the present in order to consume more in the future.”

That’s the general gist of the thing from the point of view of economics.

Now, say that consumption is zero. That implies that income is equal to aggregate expenditure on investment, government spending (unless you’re including this under the umbrella of consumption in general), and net exports. (This is unlikely in practice for obvious reasons).

If spending (i.e. on consumption) goes to zero, income doesn’t go to zero. It goes to the sum of the remaining components of aggregate expenditure, and saving is still equal to investment plus “net acquisition of financial assets”.

Do you believe it is possible for a nation to dollar-save more income than would be required to purchase all the goods that go unconsumed in a given accounting period?

I’m still unsure as to what you mean here. “All the goods that go unconsumed in a given period” seems like something that should be infinite.

On aggregate a nation can save whatever fraction of its income it does not consume. This saving can be used to finance asset acquisition, both in terms of domestic investment and net foreign assets.

If so, do you use "saving" to conceptualize:

I think of it like this: a stock of resources is used to generate income; that income can be consumed in the current period or used to add to the stock of resources for future use. That’s basically all there is to it!

a) The real goods that go unconsumed in a given period, or b) The dollar income that goes unspent in a given period, orc) The unspent dollar income in excess of what would be required, in some counterfactual, to purchase all the unconsumed goods at prevailing prices.

(a) In a closed economy, national saving will be equal to aggregate investment. The flow of saving should be conceived of as financing that investment, not being the same thing as it.

(b) Given that income equals aggregate expenditure, it must be the case that saving is equal to income less consumption expenditure.

(c) Don’t understand what you’re saying here. It seems like you could be thinking of some kind of fallacy of composition type effect. In practice saving is an ex post measure of some function or model we do not observe. If income is not spent, it must be saved; since it is saved, it must be allocated to assets, or used to reduce liabilities (i.e. it adds to net assets or net worth for the entity doing the saving). There is no theoretical sense in which all income saved can be spent in the same period, as far as I can see. By definition, income that is spent cannot be saved.

Real savings are a measure of the goods and services that your stock of savings can command.

If you save some of the monetary income you earn in a period, then you must have added to your net worth AND you must have deferred consumption, by definition.

In a monetary economy, saving monetary income and deferring consumption go together.

doesn't s-i= 0?

S – I = 0 and S = I are logically equivalent statements.

Does this make sense?

Not really.

Let’s start with this:

But it begins with the one sector model, where S=I, and S-I=0

This is not what the guys on the thread believe, and not what they have been arguing. Instead, they have claimed that in a one sector economy S = I = 0, because there is no “net saving” or “NAFA” (to use Godley’s term). That’s also what Bill Mitchell has claimed, and something that Scott Fullwiler has defended elsewhere.

In the two sector model, S-I= domestic 'savings"/accumulation of nfa,

This is not consistent with what you write about the one sector economy.

In a one sector economy, S, aggregate saving, is equal to I, aggregate investment. In a two sector economy, this is still the case; however, we can have sectoral mismatches in saving and investment. I.e., for the whole economy, S = I, but for individual sectors S can be greater than, equal to or less than I, but since we have S = I for the whole economy, if S != I for one sector, then S != I for the other.

If you divide the economy into two sectors, but still take the economy as a whole as your unit of analysis, then you still end up with S = I.

In order to make sense of (S – I), you need to focus on one sector. Let’s call one sector P and one sector G. Sector P’s saving will be given by its income less its consumption expenditure. There are now two uses for that saving: financing additions to the capital stock (i.e. “I”), or lending to the government (here, “B”, for “govt bonds”). So we have,

Sp = I + B = I + (S – I) = I + (G – T)

In words, private saving is equal to investment and net acquisition of government bonds.

For the whole economy (letting “Sg” be defined as govt saving), we still have,

S = Sp + Sg = I

It’s obviously not the case from our examination of the one sector economy that private saving is equal to net acquisition of government bonds alone, because that would imply that national saving is zero (which is absurd), and because we’ve already agreed that national saving is equal to investment. Clearly, the only way that S = I and S = 0 is if S = I = 0. So we have national saving and investment equal to zero. But this cannot be a universal statement in the form of an identity or sectoral constraint, unless you’re committed to the idea that saving and investment is impossible.

So S= I + (S-I) is a 1 sector model identity

Once again: in a closed, one sector economy, we must have S = I (iff S – I = 0) at all times.

"The two things have to match up in both nominal and real terms or you loose consistency (i.e. you do not account for all transactions)"

It seems to me that once I recognize a distinction between the nominal and real circuits, it is easy for me to imagine that all of the transactions involving real goods are represented in the nominal circuit ("accounted for"), while some purely nominal transactions still exist.

Assume that right now the real and nominal circuits are perfectly in sync. But then imagine that the government prints $100 tomorrow, gives it to me, and I bury it in a tin can in the backyard, thus preventing that money from impacting prices in any way. In this case the nominal and real circuits would become disjointed - they would "lose consistency" - but all real transactions would still be accounted for in the financial representation provided by the nominal circuit.

And since I don't want to be taken as pulling you away from your topic of interest: savings and investment, I will note that in my little thought experiment

S = I

is still true in the real circuit, while in the nominal circuit:

S = I

is still true as well.

(Hey, my "investment" in the tin can may even turn out to be a good one!)

But the S in the nominal circuit is now more than a financial representation of the S in the real circuit. The S in the nominal circuit is a financial representation of S in the real circuit *plus* the nominal adjustment made when the government handed me a nice crisp hundred dollar bill.

So the nominal and the real don't need to supervene perfectly, even while S = I in both domains.

I know you're juggling many different commenters here, so you can take your time in getting back to me.

And please be lenient with me if this is foolish - I am more philosopher than economist.

I think we’ve gone back to the philosophical definition of “real” and “nominal”.

(Incidentally, I started out studying philosophy, before discovering it was too hard and switching to English literature, before discovering that it was too badly paid and switching to economics).

When I mean the former, I'm going to put the term in quotes, and when I mean the latter, I'm going to leave it as is.

Pace RSJ (an excellent blogger), in economic terms, the distinction you make here is a bit arbitrary.

In a monetary economy, goods trade for money, not other goods. So every time there is a “real” transaction, there is a “nominal” transaction, and some numbers get entered in a spreadsheet somewhere.

It’s hard to say more beyond that without knowing more about how you are dividing transaction into “real” and “nominal”, though.

People buy and sell promises to deliver goods and services in the future, for example. How would you define these types of transactions? You say that S = I both in “nominal” and “real” terms, but then the idea of “nominal investment” makes as much sense to me as “nominal consumption”, which is to say, not much—but then I could well be misinterpreting you again.

So could you say more about what you consider to be “real”, and what the definition of “real” is?

Let me see if can say something about your thought experiment as well.

Assume that the government “prints” $100 and adds it to your pay check at the end of the month. You take this $100 and bury it in your back garden.

Then you have saved that $100. The saving is real (and nominal), as far as you’re concerned. But there has been no increase in wealth for the whole economy as a result—it’s just a redistribution of purchasing power.

Imagine for contradiction that this is not true. Then the government can deliver infinite savings to the economy, or achieve infinite purchasing power for itself, since the government can print money.

Either I am mistaken or we are making progress! By the way, I stopped by your blog the other day to find both social commentary and poetry. I was pleased to see that there are people out and about who are interested in both - I thought I was alone.

In any case, here's what I would want to say about my "real" versus "nominal" distinction.

Every time goods or services change hands in exchange for money, there is both a "real" and "nominal" transaction that takes place. In such transactions, real things (goods and services) and nominal things (dollar credits) generally flow in opposite directions. Using our "circuitry" terminology, I would say that both circuits are affected by these transactions.

Now if every time dollar credits were shuffled around in the nominal circuit it was in payment for goods and services, that is, it corresponded to some shuffling about of real things in the real circuit, then I would say that the nominal circuit is a perfect financial representation of real output, and I would not be confused by the way economists slide between talking about GDP as dollar income, and then talking about GDP as real output.

But there are some transactions in which no real goods or services are transacted, and yet dollar credits are flying about like autumn leaves! These are all adjustments to the nominal circuit, with no corresponding adjustment to the real circuit. They drive the two systems "out of sync."

So you ask about situations in which people buy and sell promises to deliver goods and services. I'm going to take one step back, and note that often when we buy and sell promises to deliver something, it is *money* that we promise to deliver.

In my view these are purely nominal transactions, even though functionally we must dive into the nexus of the real and nominal circuits to get the money to fulfill our promises (unless we are lucky enough to have some government friends). What I believe is that once we see that the real and nominal circuits can go out of sync, that we cannot treat money as a financial representation of output. Money can just be.. well... money. A credit. A number in a spreadsheet.

Punkt.

I know this must be an exceedingly *odd* way for you to think about things, accustomed as you are to treating money always and everywhere as a financial representation of real output.

But if we've made it this far together, let's return to my thought experiment, only with a few terms more clearly defined.

For me, "nominal investment" is whatever I do with the dollars that I save.

And "real investment" is what we do when we set aside real goods and services to be consumed in a later period.

(And both of these types of investment are "real" in the sense of not imaginary!)

Some nominal saving corresponds to real saving, and therefore some nominal investment corresponds to real investment. But not *all* nominal investment corresponds. The circuits can go out of sync.

That portion of "nominal investment" that does not correspond to "real investment" is created when I save some dollars that have *no* impact on the transacting of real goods and services.

Enter my thought experiment.

If the government prints $100 dollars and gives it to me, and I don't buy anything with it, then that $100 is *invisible* to the real circuit. It has no impact on prices. It is as if it does not exist for the real circuit. It plays no role in the financial representation of output.

Assume then, that I take that extra $100 of income and I "invest" it - burying it in the backyard, say, in anticipation of deflation.

Of course that investment is real to me, but it is emphatically *not* real in the sense that it corresponds to the setting aside of any real output. It is investment that takes place purely within the nominal circuit. It is the setting aside, not of output, for it represents no output, but of money... just... money.

Now you raise the issue, rightly I think, that if this is true then the government can deliver infinite (nominal) savings to the economy.

You are right in the abstract. But in practice there is a definite limit to how much nominal savings the government can deliver.

Because if the government tries to deliver nominal savings in excess of what people actually want to nominally save, then the gig is up, because people will not save that money, they will spend it - and that will be inflationary.

So the government can deliver just as much nominal savings to the economy as people are willing to "bury in their backyard." Anything more than that, and people will use those dollars to transact.

Therefore what people are willing to "nominally save" sets a limit to how much money the government could print without causing inflation.

You read my blog! I’ll have to check the stats for the spike in my page views.

I’m not sure that the way you are thinking about “real” and “nominal” is that unfamiliar. In fact, it seems like a very natural way to think about these terms, and about the economy in general.

Calling them “real” and “nominal” here seems like an open invite for equivocation though and I think it’s a bad idea to do so, given that they’re already in use for a related and crucially important concept.

But be that as it may, what you have in your “nominal” circuit is a bunch of stuff relating to current use of economic resources and a bunch of stuff that represents claims on economic resources in future states of the world.

That “nominal” circuit is not and was never meant to simply represent current use of resources. The “nominal” circuit actually is one of our current resources. It’s techne, what economists call “technology”.

All those claims on the future in the “nominal” circuit have a state contingent real value in terms of the economic resources they can command.

But knowledge is uncertain, humans are finite, and they get stuff wrong. Like Yogi Bera said, “prediction is hard, especially about the future”.

For me, "nominal investment" is whatever I do with the dollars that I save.

Another redefinition! I’ll never keep track of all this, you know...

“Nominal” investment should be investment that only occurs in the “nominal” circuit. Investment is the change in the capital stock and therefore doesn’t exist in a purely “nominal” form. Similarly, there can be no “nominal” consumption.

In your “nominal” circuit (i.e. the financial system), everything can get all bent out of shape. I’m sure we can all agree on that.

That portion of "nominal investment" that does not correspond to "real investment" is created when I save some dollars that have *no* impact on the transacting of real goods and services.

The value of claims on the future can go up or down for all sorts of reasons.

Saved income is some fraction of aggregate expenditure on goods and services. The dollars you save come from income earned producing GDP sold. No transactions, no income; no income, no saving

It seems to me that you go on in your final comment to mix economic and idiosyncratic meanings, with a bit of Keynesian AS-AD thrown in for good measure, and it’s hard to understand you’re argument, because it’s not obvious where you’re referring to what.

The government can deliver infinite nominal quantities to the private sector. But it cannot deliver infinite “nominal” (as you have defined it) quantities to the private sector, since it does not control the future.

But we need to agree on definition of investment and saving before we go any further, I think.

Assuming you plan to leave it buried in the ground forever, then it is a non-event. It is as if the government created some new dollars and then promtly burnt the lot.

On the other hand, if you plan to dig it up at some point, then it is real wealth as far as your concerned, and equivalent to keeping it in your wallet, but no more real as far as the entire economy is concerned than if the government did burn it.

(Notice that we've retreated from the august and abstract realms of philosophy into the dreary realities of economic theory.)

If the government supplies you with newly printed money, then your potential purchasing power has increased. That's true even if you never spend it, and regardless of any effect on prices.

Imagine I were to tell tou that $100 is buried outside somewhere. What would you pay to know where it is? I venture that it would be somewhere close to $100. If you were not prepared to pay close to $100, somebody else would, because, assuming no costs of retreiving the money, anything below full value is pure arbitrage profits.

Wouldn't you like to have greater wealth? If not, what good will printed money from the government be?

btw, I understand that savings is economically destructive but necessary because we have no national retirement plan.

I also understand that accumulation of wealth (financial) is the equivalent of "destroying" money because that money will never be spent. This is illustrated by the continual upward trajectory of holdings of financial wealth.

Horizontal money creation only makes this problem worse.

The solution? Don't allow massive wealth accumulation. Profits and savings are a cancer on the economic body.

Seems like most of the time we are playing a variation of the game Charades.

Vimothy:If the government supplies you with newly printed money, then your potential purchasing power has increased. That's true even if you never spend it, and regardless of any effect on prices.

Potential lies in the value you subjectively place in the current and future usefulness of the stock of dough you're looking at (plus expected income flows). Real economic activity happens when actual flows (spending/investing) occur. As Scott Fullwiler likes to say: money does not spend itself.

MMT is very much about quenching the thirst for whatever stock in fiat claims is needed to bring about a desired flow (functional finance). One could counter by arguing that one should look at ways to encourage higher volumes of flows at lower levels of stocks before accomodating 'net saving desires'. But then, many of the policy proposaly put forth by MMTers focus on precisely that. The way it's comunicated (accomodate first!) is a matter of priorities within that framework, I would say.

As dreary as our discussion has become I believe we are still philosophizing indeed...

I deny that leaving it in the ground is a non-event.

Nor is it the same as the government printing $100 and burning it - it is certainly not the same to me!

You see, I actually have $100 buried out there. I might sleep a lot better at night knowing it is there. I will certainly keep it in Quicken as I track my financial wealth over time.

You might be willing to pay me up to $99.99 dollars to know where it is and dig it up - but I'm not selling, because I *want* the $100 to be in the can. Why sell the location to you and then put my newly earned $99.99 back in the can? Am I to sell that location to someone else for $99.98?

Now you can call the $100 an increase in my *potential* purchasing power if you like. But 'tis still the case that while it is in the can (I couldn't resist) everyone else's purchasing power remains unchanged, and therefore this:

"All that happened was some small piece of purchasing power got redistributed towards you and away from everyone else."

is false.

Now you might argue that I'm going to dig it out eventually and spend it, and when I do you would be right, but that's a different issue entirely!

Let us track down and agree to this one small point before we continue:

1. The $100 dollar bill in the can increases my financial wealth, but not my real wealth. While it remains in the can, it has no effect on prices, therefore no effect on the purchasing power of others' dollars.

Yes?

(I know the feeling of being cornered by philosophy on some triviality. The resistance. The defiance. The grumbling. "But it doesn't matter!" And yet it just might... so yield my friend. Yielding hurts a lot less than we think.)

Nor is it the same as the government printing $100 and burning it - it is certainly not the same to me!

You see, I actually have $100 buried out there. I might sleep a lot better at night knowing it is there. I will certainly keep it in Quicken as I track my financial wealth over time.

Eggs-frickin-zactly, to use a technical term. That was, in fact, my point.

But look, I jest about philosophy. In reality, economists were moral philosophers long before they got distracted by fancy maths (i.e. still philosophy, but generally more cool). These guys have been thinking these thoughts for hundreds of years. They thought the way you did hundreds of years ago (it is not a new thought), examined that thought carefully, and discarded it, for the most part.

The reason that we have all these other tools, these “abstract machines” (this episteme), is that they have been evolved and developed to fit a specific purpose: to describe social affects. It is you who are cornered, and not I, because you do not have the words to describe the pathways out of the maze.

So let’s look again. The government prints $100 and gives it to you. It matters not whether this $100 sits in the ground, in a safe, or in your pocket. That’s arbitrary. Your wealth, in real terms, has increased—as you concede. If it did not increase, the $100 would hold no interest, and clearly it does. But society’s wealth cannot possibly have increased, because nothing whatsoever happened, other than the government printing some money. And society’s wealth is a function of its productive capacity, not some nominal stock of money. (Go back to my earlier proof by contradiction).

Since your wealth increased but our wealth did not, we must have redistributed wealth. And that’s exactly what happened.

ALL wealth is potential purchasing power, i.e., command over future resources—but perhaps this is a deep insight, and not won easily. It took humanity many centuries to create economic theory. I would not expect that one individual can match the achievements of so many simply by reading the odd blog. Philosophers—know how to exceed your limits! The division of labour is limited by the extent of the market! Etc!

I understand that savings is economically destructive but necessary because we have no national retirement plan.

I also understand that accumulation of wealth (financial) is the equivalent of "destroying" money because that money will never be spent. This is illustrated by the continual upward trajectory of holdings of financial wealth.

The $100 dollar bill in the can increases my financial wealth, but not my real wealth. While it remains in the can, it has no effect on prices, therefore no effect on the purchasing power of others' dollars.

No. It increases your real wealth. It must do. The fact that it does not affect prices is irrelevant. If I own a bond, my owning it does not affect the price of potato chips or hair cuts. Nevertheless, it's clear that the bond has real a value that is easy to compute both in practice and in theory.

Isn't an increase in value [per the market] in equities a creation of [credit] money without an offsetting charge to someone else's balance sheet?

When the stock market rises, the increased equity paves the way for more debt, because more collateral is available. I guess the answer is that for it to be used as credit money, a loan would need to be taken against it, and then there would be a balancing entry?

I mean this playfully, my friend, but I must say that pursuing you is like pursuing the butterfly that will not come to rest on me until I sit absolutely still.

And I appear to have made a sudden movement!

We return to my $100 in the can.

a. Government prints $100 and gives it to me.b. I put $100 in the can.c. Since I do not spend the $100 nothing of any economic importance whatsoever happens, EXCEPT.d. I have an extra $100 in a can.

You characterized this as identical to the government printing $100 and promptly burning it, and you are *almost exactly* right. Everything of any economic significance (the price level, the pattern of production, the amount of goods and services enjoyed by others, the quantity of dollars that others hold) is unchanged.

$100 in a can is an increase in nominal wealth, not real wealth (in that it represents neither sweat nor atoms).

What will that $100 in a can get you? An hour's honest labor? A doughnut? Nothing at all because we've switched currency? The answer is: it could theoretically be any (real) thing because who knows what the exchange rates will be when you dig up the can. The only thing you can say for sure is that it will extinguish a $100 obligation.

This is nominal wealth. You can try to manage inflation/deflation by multiplying it by some index-linked modifier, which is fine, but it is not real and economists like to elide this difference so they can lift the "veil of money".

This is why they don't understand money.

"Real", in the sweat and atoms sense, can be valued (get a price) but is fundamentally what it is. A bar of gold is the same bar of gold in Japan or New York, even though it may be priced in both dollars and yen.

Economists know very well that there is nothing tying real and nominal quantities together. That's why they've spent so much time developing economic theory, and why, if you reject it, you end up in Wonderland next to the March Hare and the Cheshire Cat.

You big flirt! I suspect that with your new informal tone you're lulling me into a false sense of security.

Reaching far back into the mists of the thread, my condition was as follows:

Assuming you plan to leave it buried in the ground forever, then it is a non-event. It is as if the government created some new dollars and then promptly burnt the lot.

On the other hand, if you plan to dig it up at some point, then it is real wealth as far as your concerned, and equivalent to keeping it in your wallet, but no more real as far as the entire economy is concerned than if the government did burn it.

They know, but then they forget. They construct toy models that begin with barter, instead of beginning with debt. "Veil of money" is a very real and old economic problem (Mills), and I guess we can all draw our own conclusions about how well current macro-models cope with that. We can also observe how much consensus there is around those model in the academy right now.

I might end up in Wonderland if I reject them, but I might also learn that loans create deposits, that the national debt is the non-govt's financial assets (equity) to the penny, and that banks aren't reserve constrained when they lend. Who knows, I may even come to see that there's no such thing as the loanable funds market that channels savings to investment.

So when the government prints and gives me $100, then that is of no economic significance, provided I don't spend it, and no matter where I hold it.

Do you agree, also, that if I do not spend it, that this printing of $100 and handing it over to me is not a *redistribution* of wealth?

Here are the points to consider:

a. By not spending it, it has no effect on the price level, therefore it does not impact the value of the dollars that others hold.b. No one else loses any dollars when I get my $100.c. No one else loses any stuff when I get my $100d. I don't spend the $100, so I don't get any stuff I wouldn't otherwise have had.

The thesis on the table:

The government printing and giving me $100 dollars is not a redistribution of wealth, provided I don't spend the $100 dollars.

"Vimothy hasn't "outed himself" as an Austrian - as if being an Austrian is necessarily something to hide."

You read way too much into what I wrote. I don't voluntarily enter into discussions with "religious" Austrian types. Many thousands of hours have been wasted on the internet trying to move immovable objects.

"Vimothy is making a good faith effort to understand. I, for one, enjoy discussing with him."

And you should by all means continue. Why you bothered addressing my comment is puzzling however. My comment was directed at vimothy.

"If you find it frustrating to do the work required to help your thoughts germinate in his mind, then you shouldn't do that work. You're liable to do more harm than good!"

That was exactly what I did when I said it was pointless to go on. Speaking only for myself of course!!!

So when the government prints and gives me $100, then that is of no economic significance, provided I don't spend it, and no matter where I hold it.

Do you agree, also, that if I do not spend it, that this printing of $100 and handing it over to me is not a *redistribution* of wealth?

Hmm—I don’t think I agree with either of those statements. Rather, they seem to be antithetical to my position here.

It’s not the case that the government giving you $100 is a non-event, even if you do not spend it.

My condition was meant to capture the difference between being able to spend the $100 but choosing not to, and perfect certainty that the money will never be spent. Perhaps it was phrased somewhat ineptly.

If the money is buried and lost forever, then it is a non-event. If the money can be recovered, then it is an event and not a non-event; in fact, it’s a very typical sort of event in modern economies.

I could say more, but before I do, I’d like to ask you a slightly unorthodox question in return here, if I may: Why do I think that it important that the money can be recovered, even if it is not?

the economic importance of the can in that period depends on what actions it impacts in that period.

So, if George starts saving less (spending more of his income on consumables) because of the peace of mind that the can brings him, then there's more income, and the economy stops real saving by having people be unemployed.

This has nothing to do with what you can and cannot do with the can's contents. And it has everything to do with the MMT observation that only the Govt can create the type of money that sits in the can at the sector level.

“The government printing and giving me $100 dollars is not a redistribution of wealth, provided I don't spend the $100 dollars.”

I think that this is false, but in order to see why it’s false, we need to develop a notion of wealth.

What do you think of George’s proposition?

It seems to me that you are saying something extra.

What happens when someone decides to lower or raise their rate of saving will depend on how this decision interacts with the decisions of all the other actors in the economy, and so which effect dominates in practice will be determined by a host of contingent factors.

"Real" vs. "Nominal" is more interesting than I though before in the context of government money injection.

I do not think it is easy or perhaps even possible to predict the probability of the following actions of the "rational" agent as a consequence of the $100 "shock":

1. Hoarding -> no effect

2. Spending -> increase in aggregate demand

given the economic climate, the scale of the government money injection, etc.

Presumably, in aggregate, the answer is: most likely (2), but not clear in the instance of the specific person.

What the effect of such spending would be is not altogether clear either buying power redistribution may or may not be compensated by increase in aggregate supply. Employment may or may not increase due to import leakages or unwillingness by the businesses to hire because they can increase production with available workforce anyway (or not).

As I understand MMTs criticisms of mainstream econ it centers around a misunderstanding of banking operations, but also notions that compare a govt like the US to a household. Ideas like loanable funds or govt borrowing are the first two that come to mind. Additionally the money multiplier. I think its clear that these ideas are not just wrong but badly wrong for a country like the US.

Mainstreams critiques of MMT center around the notion of deficits and saving plus the idea of imports being a benefit that can be maintained indefinitely.

Personally I dont see the mainstreams critiques of MMT being very substantial. More centered around preferences then operational and economic realities.

I think you are creating a false equivalence. Mainstream has many things badly wrong, MMT simply looks at deficits and imports in a way that makes some people uncomfortable.

"But then imagine that the government prints $100 tomorrow, gives it to me, and I bury it in a tin can in the backyard, thus preventing that money from impacting prices in any way. In this case the nominal and real circuits would become disjointed"

In your example above, you do not have a "nominal"/"real" circuits which somehow get out of synch. Instead, you have two different cases, one without any government dis-saving/deficit spending and the other with $100 government deficit spending.

Thus, in the first case you saved, say, $1,000 and invested it all in commercial real estate. In the second case, you have $1,100 saved total, thanks to the government spending $100, with $1,000 still invested in real estate and $100 sitting in your tin box.

The S=I identity holds in both cases for the entire economy (without the foreign sector for simplicity): the first case is obvious, in the second: S= Sp+Sg = $1,100 - $100 = $1,000, i.e. S=I. Where Sp stands for private saving and Sg for the government saving.

Yes you can recover the money and spend it if you like. Absolutely. I want that to be so.

But I'm only interested in the period when the money stays in the can, as yet unrecovered.

And my accounts in Quicken reflect that $100 cash in the can.

These are the facts we both recognize, and upon which we shall now reason together.

*So long as the cash is in the can,* I argue that there has been no *redistribution* of wealth. And here are the points that back up my position:

a. By not spending the $100, that $100 has no effect on the price level, therefore it does not impact the value of the dollars that others hold.b. No one else loses any dollars when I get my $100.c. No one else loses any stuff when I get my $100d. I don't spend the $100, so I don't get any stuff I wouldn't otherwise have had.

I believe each of those considerations to be true. And for me those four considerations, taken together, are good enough to say that there has been no "redistribution of wealth."

Kindly tell me which of those four points you reject.

And if you accept all four, which definition of "wealth" will make my receipt of the $100 a redistribution thereof?

No, I actually agree with you. George is wrong. A $100 gift to an individual is redistribution, although if you want to be a stickler about it you can call it a nominal wealth redistribution. This is true even if it is not spent. The % distribution of NFA (equity) shifts after the event. I'm OK with saying it isn't a real (sweat & atoms) wealth redistribution until it gets spent on a real asset.

The extra thing that I am saying is simply the observation that, in the real world, an agent's stock of NFA (equity) impacts in-period consumption decisions. So even if the money is never spent, it may still have an economic impact through animal spirits. If I had more in the bank, I'd spend more of my salary in each period.

GEORGE: If keen gets around to understanding balance sheets and how only the government can supply NFA (equity), then his models will look like an MMT description of the world.

And, of your 4 propositions, I reject #5: everyone's % of extant NFA equity is the same. Because it isn't. This represents a real change in nominal wealth which shows up in balance sheets. It does not represent any change in real wealth.

I don’t think it can be a false equivalence since it’s my impression and not a logical argument.

I don’t want to start too many parallel arguments here, but many of the MMT critiques of mainstream theory are straw man attacks on misunderstood bits of Principles texts. If you think these critiques are good, do you ever listen to what the other side is saying, i.e. read some mainstream stuff?

I feel as if I have been grabbed by my heels now—but I think I can still wriggle free.

Perhaps I could agree with all four of your points, depending on interpretation, but it still wouldn’t make me conclude that no wealth has been redistributed.

Let’s reflect on where we are for a moment, because in many ways your argument is quite strange and idiosyncratic.

It’s clear that in a conventional sense, you are wealthier with the $100 in a can. Your assets have increased by the value of $100, and your liabilities are unchanged. Thus, you are $100 wealthier. Do you agree with that? It seems that you must.

Now, if this is not redistributive, everyone else’s real wealth must be the same ex post as ex ante, which implies that,

1, The government can deliver or obtain infinite wealth at no cost to anyone simply by printing money;2, The economy has somehow become more productive as a result of the transfer;3, The impact of the productivity shock is such that the ex post distribution of wealth exactly matches its ex ante distribution.

None of which are remotely plausible, as far as I can see.

Taking your four points in turn then:

(a) It’s true that conditional on your not spending the $100, there will be no contribution from the transfer to changes in the price level. But of course, that’s exactly what we should expect. If I hold a portfolio of shares in some company, this is unlikely to cause inflation. Why would it? Nevertheless, it’s easy to see how issuing more shares can dilute existing ownership claims on the company’s assets.

Perhaps you could explain a little more about why this should turn on the issue of consumer price inflation?

Here’s a little heuristic to go with my question. Imagine a world in which the government gives you the money—call this world A—vs. a world in which it does not—world B. I also exist and in both worlds already possess a $100 bill of my own. Say that in world A, there is an X% chance that we will both try to spend our wealth in the same time period, driving up consumer prices, and lowering the real value of the $100 bills. In which world am I better-off: world A or world B?

(b) & (c) I sense that there is some equivocation here. We’re not concerned with simply the value of a stock of dollars measured against current output, but with the value of a stock of wealth. That wealth represents claims on future output. Since your claims on future output have increased in value, unless future output has also increased, the value of everybody else’s claims on that identical stream of output must have fallen.

(d) When you write that you don’t get any stuff you otherwise wouldn’t have had, you are forgetting to take into account the obviously non-zero value to you of being able to use that $100 if you choose to. This, in my view, is a “stuff”.

By analogy, think of insurance (part of your “nominal” circuit). The government could set up an insurance policy for you such that if for whatever reason you couldn’t afford to achieve some reference level of consumption, it would make up the difference. It’s clear that you are better off as a result even if you never draw on the policy in practice! Right? That’s why people pay for insurance. Otherwise, it would be a good that never has a price and wouldn’t trade in markets. But it does have a price, and it does trade.

What do you say?

If there is a nonzero chance that you will be made better off, there is a nonzero chance that everyone else will be made worse off, ceteris paribus. The present expected value of their real wealth is therefore lower.

What the effect of such spending would be is not altogether clear either buying power redistribution may or may not be compensated by increase in aggregate supply. Employment may or may not increase due to import leakages or unwillingness by the businesses to hire because they can increase production with available workforce anyway (or not).

I like the way you think!

In effect, it all depends. So, in order to say more about what could happen and why, we need to make lots of assumptions about the behaviour of agents and the structure of the economy, we need to allow for chance and uncertainty, and then we need to see how it all interacts. It’s hard to say what will happen or why without doing that first. I don’t think that we can assume that the government can simply issue money until the economy magically arrives at full employment. That implies a very particular, highly aggregated, rather brutally mechanical and deterministic view of the economy.

A psychological fiddle that clearly works in the actual world with actual people.

"That wealth represents claims on future output. Since your claims on future output have increased in value, unless future output has also increased, the value of everybody else’s claims on that identical stream of output must have fallen."

Nope. Everybody can pretend to themselves that they have a future claim on output - because those claims haven't been put in yet.

Exactly like the claims on a bank.

Whether the claim, the belief and the reality turn out to be the same is something the future has to deal with - and which it will in the usual fashion, by doling out actual resources in some manner.

Say that there is a stream of output over time. Let its expected present value equal X. You sell claims to this stream of output that can’t all be satisfied, but leaving the actual distribution of the stream to some chance mechanism. It’s clear that the value of these claims cannot all be equal to X, the value of the entire stream.

"You sell claims to this stream of output that can’t all be satisfied, but leaving the actual distribution of the stream to some chance mechanism. It’s clear that the value of these claims cannot all be equal to X, the value of the entire stream."

Correct. Why should it be.

It's the same approach as fractional banking which sells lots of claims on its capital. But it knows that most of those claims won't happen.

And similarly on the computer you are using, where you will have a facility called 'virtual memory'. Which is an overcommit on the real memory because most processes won't need much of it.

That way all the real memory is almost always in use by something.

Similarly with a very great number of dynamic systems. Roads, swimming pools, gyms, aircraft.

The world is full of overcommits, because it is a good long term proven engineering strategy in a dynamic environment.

I don't think it's fair to dismiss nominal wealth as a psychological fiddle. Extinguishing a tax obligation is a material benefit, there's nothing psychological about not being in jail.

vimothy:

i don't believe that printing money is always the way for a government to reach full employment. It is when unemployment is caused by insufficient NFA (equity) as it is now, but otherwise not necessarily. I'm not sure where you've heard this claim made.

MMT does not take this position either because they like the ELR JG policy (which I do not support, btw.)

"i don't believe that printing money is always the way for a government to reach full employment. "

I can see as I indicated above how, hypothetically, money injection *may* increase employment, but that particular outcome's just one of many possible worlds with unknown and perhaps uncomputable in principle probability assignments.

What's the causal chain connecting lack of NFA and unemployment in your opinion ? I am familiar with that particular MMT? claim, but I have been unable to interpret it in any way other than injecting gov. money and hoping that AG will somehow pick up. Apparently, you have some other causal explanation ?

The MMT causal explanation is called 'desire to net save', which can only be addressed by accomodation of that desire. I guess one guage to look at in determining the level of that desire would be changes in private sector vs. public sector debt levels and of course the external sector. The reason accomodation may not be sufficient to eliminate unemployment is because other limiting factors, most prominently inflation, kick in before. Further disaggregation is needed to analyse and 'supply side' measures, such as the JG or financial regulation or capital controls, must be taken to clear the labour market before things go foul. I personally do not fully buy into the JG, although I think its shortcomings would probably be benign in reality. My reading of it is that it is an intermediate instrument to bring upon 'real' full employment thus rendering it superfluous in an optimal world. I can see that it would act as a price floor in a downturn. I can't see how it could possibly act as an effective price anchor in such an optimal context - which is precisely when a price anchor is most needed. But I may have misread.

That was a general comment and not directed at anyone in particular, but maybe I was being a little unfair.

It seems a bit circular though to say that supplying NFA will bring the economy to full employment when it’s a lack of NFA that’s keeping it from full employment.

Why would a shortage of treasury bills cause unemployment? How do we tell the difference between states of the world in which unemployment is caused by a lack of treasury bills, and states of the world in which it is not?

Well, you should dismiss fractional banking, as the loans a bank makes are not an "overcommit" of its deposits.

My point is that nominal wealth is not a "psychological fiddle" (your term) because it has a real and material benefit that does not come from Nash equilibrium nor dynamic theory.

Госбанк/vimothy:

Oliver is right -- the non-govt sector has some demand for NFA (equity), and this demand is exogenous and can change. If the NFA (e) supplied is too small, you get unemployment (subject to many caveats). If it is too large, you get inflation (subject o many caveats).

Treasury bills are one instance that NFA (e) can be stored in. If the government writes me a check for $100, and then taxes away $10, I don't neccessary rush to place my remaining $90 in a Treasury bill. I encourage you to think more broadly about what construed NFA(e), how it's level changes, and how agents might then use (or not) the NFA(e) they have. Remember -- agents must have NFA(e) in some non-Treasury bill form BEFORE they can purchase a Treasury bill. This is not a chicken-or-egg situation.

We tell the difference between states of the world in which unemployment is caused by lack of NFA(e) vs other reasons by 1) understanding how the monetary system really works, 2) observing reality.

For example, if there is a credit bubble, which then pops, the non-govt sector may wish that they had not taken on the leverage they did during the bubble and want to de-lever. Or they may want a larger nest egg as the variance of the expected future income stream grows. If this results in an increase in NFA(e) at an aggregate level, and this desire is not met, then you have paradox of thrift conditions where higher S (net of consumption) reveals itself as higher I in the form of unsold inventory and unemployment.

You would need the ability to discern between wanted and unwanted inventory, just as you would need the ability to discern between wanted and unwanted unemployment. There's no substitute for thinking.

1. I am not sure I understand what it means. A person just desires to save/postpone consumption using whatever means, why the person would feel a special desire to save in Gov bonds rather than in IBM bonds given his risk tolerance level ? The government paper is not entirely riskless obviously (other than credit risk free to a degree).

2. More importantly, assuming that desire, I do not see how exactly unemployment level is affected by such desire. Could you elaborate ?

I guess I still do not understand why a person would have specific need for government paper other than to optimize his/her portfolio according to personal risk tolerance.

Portfolio optimization aside, how does the 'desire for NFA' helps unemployed people ? They are presumably not much into optimizing portfolios, but into looking for a job I'd imagine. Is the 'desire for NFA' just a circumlocution for hoping to get an unemployment check ?

I am not being snide, but just curious as to what exactly the causal link, spelled out in some detail, would be between level of NFA in the portfolio and unemployment.

Or, to put it in laymen's terms, why is the desire to pay down debt or have a larger nest egg so hard to understand easy to reject for economists?

Nevertheless, even if one cannot understand why someone might want a larger rainy day fund, it is still an observable fact. There is demand for NFA(e) and this demand changes.

The desire for NFA(e) neither helps nor does not help involuntary unemployed people. The problem occurs when an increase in desire for NFA(e) is not fully met. The sector cannot increase NFA(e), but in trying to do so, velocity falls, income (flow) falls, and you get falling AD. The S is booked as unsold inventory and unemployment.

If NFA(e) is increased (many methods are possible, lower taxes, higher G, both of which can be implemented in many ways) then velocity increases again, AD increases, unsold inventory is sold, and idle workers return to the line.

This is basic "paradox of thrift" stuff. Except it acknowledges that NFA(e) can only come from one source.

It is insufficient to explain NFA specialness -- ask retirees today if they particularly crave NFS or rather prefer muni bonds or even blue chip bonds in their portfolio or even God forbid gold.

2. "why is the desire to pay down debt or have a larger nest egg so hard to understand "

It is quite easy to understand the "desire" it is much harder to satisfy the desire by finding a job today. I bet any unemloyed person could not care less whether the salary would come in the shape of NFA or just credit money -- it's all dollars to him. Again, what's so special about NFA in that context ?

3. "There is demand for NFA(e) and this demand changes."

See above. And:

I did not observe, empirically, much desire for NFA in comparison to other assets either in my own case or other folks' I am familiar with. Just the opposite -- thanks to the fabulous returns one can get on Gov. paper today thanks to various QE iterations, arguably.

4. "If NFA(e) is increased (many methods are possible, lower taxes, higher G, both of which can be implemented in many ways) then velocity increases again, AD increases, unsold inventory is sold, and idle workers return to the line."

And that statement is highly debatable as has been indicated earlier. Whether or not AD increases thanks to NFA injection is a very uneducated guess despite the guessor's credentials and education.

Also, how do you propose to inject NFA into the households, practically speaking, other than through the existing unemployment benefits payments ?

How do you prevent NFA leakage abroad if folks who possess the coveted newly printed NFA would buy imports rather than spending on home-made goods to revive the domestic stagnant economy ?

3. Yes. QE reduces NFA(e) and is likely contractionary in this environment. That has been the Japanese example for 30 years, and the US example for 3.

And yet, people see the enormous Japanese "debt", see on-going persistent deflation, and don't see the Japanese demand for NFA(e).

4. NFA(e) injections can occur via Government spending. The Government can hire unemployed people and voila, they are employed. I don't think that is the right approach today, but if you are being honest, it is hard to dispute this mechanism at a first order level.

I would propose that the Govt inject NFA(e) in the current environment simply by taxing less. Payroll tax holiday is my favorite.

If people abroad want to increase NFA(e) (like the Chinese Govt) then the Govt should simply generate additional NFA(e) to satisfy that demand. After all, this exchange involves them giving the US real (sweat and atoms) goods and services for numbers in a spreadsheet. In real terms it benefits the importer.

There are problems with how this impacts the domestic economy (as you say) and I'm open to some fairly unfashionable ideas for dealing with that, including industrial policy (yes!) but, more generally, if you create enough NFA(e) you should be able to employ everyone who wants to work domestically AND satisfy overseas NFA(e) desire.

1. No, I don't [need NFA]. If the transaction counter-parties are at different banks, it it up to the banks to settle interbank obligations which for the most part cancel each other (in a frictionless interbank, you would not need NFA to settle at all. Canada comes pretty close with its close to zero interbank money volume). The banking system peculiarities are of no concern to me as a consumer/household and I do not need to procure NFA in order to make the transactions possible.

2. That's true, but what do we care about the private sector as a whole ? Households as you seem to agree can save without NFA. The firms condition of being liable to households is natural by design.

4. I thought you were not very supportive of the ELR. In one' minds, the theoretical viability of that option, however, somehow raises the specter of the Soviet Union that had definitely been the ELR as well as the EFR, as a practical implementation.

Anyway, NFA used as a means to provide an accounting/measuring stick for those employed via the ELR/JG seems a "natural" tool for the purpose. At least, that's the impression I arrived at after having read for a while various MMT sources. In my opinion, other uses of that facility [NFA] are unimportant and secondary, including cash transactions and interbank settlement which is by itself an uninteresting implementation detail the banking system might have existed without in an alternative universe.

Tax nature of NFA is rather contrived (in my opinion) especially in this time and age where tax payments are effectuated in bulk with horizontal money, either in the form of checks or electronic transfers of part of your horizontal account balance, leaving the rest for the banks and the treasury to sort out.

The NFA leakage abroad is another issue that I am not prepared to tackle right now due to the complexity of the subject beyond observing the fact that the stuff the exporters get in exchange for goods are real contractual claims, not dissimilar from company shares, and not mere "spreadsheet entries".

1. NFA(e) are not reserves. This has nothing to do with interbank obligations.

And yes a household absolutely needs NFA(e) to buy a t-bill (without going into debt). Is Uncle Sam just going to give it to you?

2. I care about the private sector as a whole (although I actually care about the non-Govt sector) because that sector, as a whole, has a demand for NFA(e). Households, as a sector, can only have positive NFA(e) if some other sector can (stably) run negative NFA(e). Firms cannot do this. Only one sector can.

4. I am not supportive of ELR. Did I misstype? Apologies. But a payroll tax holiday (which I like) is not ELR. It's just draining less NFA(e).

I don't think you're thinking of what I'm thinking of when I use the phrase NFA(e) as it really has nothing to do with bank reserves.

Also, as I know Mosler & JKH use the terms horizontal and vertical money in different ways, I would prefer if we didn't use those terms (or define them upfront).

I use the Mosler definition, where non-Govt sector gross financial asset (GFA) is bank lending (horizontal), while G-T is NFA(e), and is vertical because it's injected into the non-govt sector by the govt sector.

Note that all QE does is alter the term structure of outstanding NFA(e)--it does not actually net create or destroy NFA(e). This is also why reserves aren't NFA(e) (although I don't want to get into a debate about whether the Federal Reserve is truly part of the Govt or not)

We did. But each of those dollars, and the grand total of them, represent a generic contract, a claim on the US current and future resources/output (in Vimothy's sense :), not very much dissimilar from a company's shares, they are not just pieces of paper or electrons in the computer.

Sometimes they are, sometimes they are not. They are not when they exist in the shape of paper notes or government bonds. However, when the treasury pays you for whatever reason, in the majority of cases it increases the reserve balance at your bank rather than sends you paper notes. So, your personal NFA exists as part of reserves in the banking system, not necessarily "physically" at your bank should it decide to lend in the interbank. Likewise, for the majority of the payees until such moment that they decide to obtain paper notes. Then, the bank(s) will be obligated to convert the owners' NFA's into the desired representation.

"And yes a household absolutely needs NFA(e) to buy a t-bill"Not at all. Imagine a worker being paid by a firm in horizontal/aka credit money. He is not obligated to obtain federal reserve notes should he desire to buy a t-bond. It's not his problem and he is not even aware there may be a problem -- it's up to the bank and the treasury to accommodate the conversion from credit money to reserves and settle the transaction with reserves.

But those are uninteresting and incidental details peculiar to the existing banking system that I am sure you are aware of.

4. "But a payroll tax holiday (which I like) is not ELR. It's just draining less NFA(e)."That's correct. However, merely plugging the tax leak does not help much the unemployed although it may or may not stimulate AD (or alternatively increase leakage through imports), you will have to engage in some "claims-on-wealth" redistribution through taxation or NFA printing (which is sort of taxation in the long run).

"I use the Mosler definition, where non-Govt sector gross financial asset (GFA) is bank lending (horizontal), while G-T is NFA(e), and is vertical because it's injected into the non-govt sector by the govt sector."I think there is no misunderstanding. We agree I think that horizontal money is bank lending/aka credit money. And I hope we agree that "vertical money" is also known as M0 or interbank money or base money or Randy's "high-powered money" and can exist in the shape of bank reserves or paper notes, convertible one into the other as needed -- that's how it's understood by bank practitioners and economists.

Thus, NFA can be embodied as "vertical money" or gov. bonds.

All reserves are not NFA of course but some may be at a given moment as a result of government spending that increases NFA by definition :)

NFA's are dollar balances added to private sector bank accounts as spending replacing existing dollar balances in other private sector accounts that were swapped for bonds. Reserves never see the real-world light-of-day as reserves exist only on the government side of a balance sheet that has infinite resources (unlimited access to numbers).

Reserves are abstract constructs residing in the same space as the points that end up on scoreboards.

Dollar NFA's are limited in magnitude by the number that existed at t=0 (inception). This would be a very small number in relative terms denominated in millions. The path to significant NFA dollar balances at t=now is non-existent unless the institutional requirement alluded to in the previous paragraph were somehow circumventable.

Fortunately (or perhaps unfortunately) there is a back door for NFA dollar creation that doesn't require selling of bonds to the public, in which the Fed buys the bonds issued by the Treasury indirectly through primary dealer operations and holds them itself.

I am confident that none of these claims will be thought controversial, just trying to cut through some of the fog that is being generated in massive quantities.

Mathematical proof of the above statements is a trivial exercise.

The discussion assumes there is no credit circuit, but remains true when horizontal money creation is introduced without further revision.

Your assertion that a nominal number is a future claim on production begs the question. For example, if the US experienced hyperinflation and started using the peso, the $100 wouldn't be a claim on anything, but would still extinguish a $100 obligation.

This is the hard real (sweat & atoms)/nominal distinction that's crystal clear in MMT but swings in and out of focus in mainstream economics.

Looking at mixed currency regimes in third world countries, or scrip economies, highlights this difference further.

1. When the Treasury pays you, it increases your bank account, which increases the reserve account. Your bank account is held as a liabilty at your bank, the bank has a reserve account as an asset, and that reserve account is a liability at the Fed.

The Treasury injection is what creates NFA(e). The accounting increases reserves as a consequence, that must either be drained or not in ON IB market depending on how the FFR regime is working (today, with OIR, its' a little different).

The causality here is important, because increasing reserves directly (which is what was done in QE) has no channel to impact anything apart from interest rates. Banks don't lend more, and consumers cannot buy more. Both of these situations is reversed with NFA(e) creation through Treasury spending.

Also, you are correct, an agent can borrow to buy a T-bill. I got that wrong. What they cannot do is increase their NFA(e) at a sector level.

4. If the symptom is a sector trying to increase NFA(e), and failing because of Paradox of Thrift, which is causing falling AD, which is causing unemployment, then the cure would be to fund that demand of NFA(e), eliminate paradox of thrift conditions, raise AD, and lower unemployment.

You may disagree with the diagnosis, but the logic of the cure is clear. It is also circular, but only in the sense that "a man who is thirsty for water, when given water to quench his thirst will cease to be thirsty".

NFA(e) creation happens every time a government spends. NFA(e) uncreation happens every time a government taxes. Government redistributes all the time, and we, as a society, are OK with that.

There are ways to create and un-create NFA(e) that redistribute less and more. I think a payroll tax holiday redistributes less, which is why I prefer it. Others may find this feature to be a bug.

NFA printing is not taxation in the short or long run. It may or may not lead to inflation. If it leads to inflation, then that's certainly redistribution, but I wouldn't call it taxation because (as we're trying to be more precise in our terminology) taxation is T which is NFA(e) uncreation.

We don't agree that vertical money is interbank money. Nor is it limited to Govt bonds. It is what G-T is in the non-Govt sector. It is NFA(e).